Target Costing

Maria Osipova
Inna Dueck
Tatiana Volina
Ivan Kraynev
Vladimir Alferov
History
Target costing was invented by Toyota in 1965
Reasons:
80-90% of the life cycle cost is determined at the
design phase of the product (Tanaka)
continuous improvement, cost kaizen, inevitably
lead to fewer opportunities to cut costs (Tanaka)

SOLUTION: actual costs -> predetermined costs
Definition
Target Costing is defined as a cost
management tool for reducing the
overall cost of a product over its
entire life-cycle with the help of
production, engineering, research
and design.
TARGET-COSTING PRINCIPLES
1. price-led costing.
2. focus on customers.
3. focus on design.
4. cross-functional involvement.
5. value-chain involvement.
6. a life-cycle orientation..

Target costing objectives

To identify the cost at which the product must
be manufactured if it's to earn its target profit
margin at its expected or target selling price.
To decompose the production process and then
to set cost targets for each product element.
Approaches to target costing
Price-based targeting
Cost-based targeting
Value-based targeting

A target cost is the maximum amount of cost
that can be incurred on a product.
Target Cost = Market Price Expected Margin
Price-based targeting

Sets target cost for the product through
comparison with that of competitors
This means setting the price of the product by
observing what the market will bear, then
deducting the desired profit margin from the
price, and thereby obtaining the target cost.
Cost-based targeting
It sets the cost 1st, then the desired profit
margin is derived at the price of the product.
This method requires the suppliers to reveal the
very details of their cost structure and will sour
the buyer-supplier relationships so itsnt good
for the long run.

Value-based targeting
It sets the price by what it thinks the market will
value the product
After that, the producer sets the desired profit
margin and then tries all ways to keep the cost
below that of the target cost.

Benefits

Delivering the optimal value proposition to
end customers.
Minimizing product-line complexity.
Selecting appropriate product and process
technologies.
Lowering product design late in the innovation
process.
Eliminating cost overruns.

Negative points
possible misuse of the technique.
Producers might make use of cost-based target costing to
squeeze the profit margins of suppliers, thereby getting
materials at the lowest cost possible.
the stress on the design team of companies using target
costing
disadvantage to the company.
Product development time might be lengthen as product
is repeatedly designed to bring cost below that of target.


Three main elements of the target costing process
by Cooper & Slagmulder


Implementation
1. Price-led costing ~ market prices are used to
determine target costs

2. Focus on customers ~ value to the customer
must be greater than the cost of the product itself

3. Focus on design ~ cost control must occur
before production

4. Cross-functional involvement ~ interfunctional
product and process teams

5. Value-chain involvement ~ all members of the
value chain included

6. Life-cycle orientation ~ minimizing total life-
cycle costs


Control Points

Top management in case of establishing a new product

Cost estimating group decomposing the preset value

Cross-functional target costing teams analysing the
production process
Similar approach to the target
costing by Caterpillar
The main aim: to reduce costs by 5.4%

The cost of the comparable model is based on
current manufacturing capabilities
Similar approach to the target
costing by Caterpillar
cross-functional organizational team
emphasize cost reduction during the new
product development cycle
reduce costs through efficiency improvements


Caterpillar
Similar approach to the target
costing by Caterpillar
A few areas of reduction:
Assembly
Cab
Engine
Hydraulics
Power Train
Structures
Linkage
Other

Target costing prospectives
Target costing which has been widely used by
Japanese firms since 1970s now is spread all
over the world
Main industries: transportation and heavy
equipment industries (Intensive competition,
extensive supply chains, and relatively long
product development cycles)



Thank you for attention